24 RELATE TO EQUITY PORTFOLIO MANAGEMENT. BRAD EDOVIC IS...

Questions 19-24 relate to Equity Portfolio Management.

Brad Edovic is head of the family office for a high-net worth individual. Edovic is

performing due diligence on equity portfolio managers by evaluating publicly available

information as well as the managers' responses to a standard questionnaire. Based on this

information, Edovic decides to focus on three active managers: Xetec, Yang, and Zable.

Based on each manager's performance over the last two complete economic cycles, Edovic

compiles the data in Exhibit 1.

Exhibit 1: Active Return Data

Xetec Yang Zable

Active return 2.0% 1.5% 1.0%

Standard deviation of active return 3.0% 2.5% 1.5%

Number of investment insights implemented 64 36 121

Edovic examines a typical portfolio composition for each manager.

 Xetec has $600 million in long equity positions and $100 million in short equity

positions.

 Yang has $300 million in long equity positions, $300 million in short equity positions,

and $30 million in long futures positions on a foreign equity index.

 Zable holds a well-diversified portfolio of long equity positions.

Edovic performs multiple holdings-based analyses of Zable over the last eight years. For

example the column -8 years is based on holdings 8 years ago, -6 is 6 years ago, and of

course current is based on current holdings in the fund. This is shown in Exhibit 2.

Exhibit 2: Holdings-Based Analysis for Zable

-8 years -6 years -4 years -2 years Current

Large-cap growth 10% 10% 15% 15% 10%

Large-cap value 10% 20% 45% 35% 10%

Mid-cap growth 30% 30% 10% 20% 30%

Mid-cap value 10% 10% 20% 20% 10%

Small-cap growth 30% 20% 5% 5% 30%

Small-cap value 10% 10% 5% 5% 10%

After completing his due diligence, Edovic chooses to invest with each of these three

managers using a core-satellite approach. Edovic establishes investment objectives for his

total portfolio that include maximum active risk of 1.0% and a minimum information ratio of

1.1. He allocates a percentage to each manager, assuming their active returns are

uncorrelated.

...

Which of the following responses to Edovic's questionnaire regarding fee structures is most

likely to indicate that the manager's interests are aligned with investors' interests?

A) Yang's incentive fee structure is symmetric.

B) Zable's fee structure is on a sliding scale of market value.

C) Xetec's fees are calculated on an ad valorem basis.

Question #20 of 60

Xetec's portfolio strategy is most accurately described as:

A) market neutral.

B) short extension.

C) alpha and beta separation.

Question #21 of 60

Over time, Yang is most likely to generate the greatest alpha from:

A) long equity positions.

B) short equity positions.

C) long futures positions.

Question #22 of 60

Based on the analysis of historical data in Exhibit 1 and comparing the three managers, which

of the following statements is most accurate?

A) Xetec is the most reliant on investor breadth.

B) Zable has the lowest information ratio over the historical period measured.

C) Yang is the most reliant on depth of knowledge and the accuracy of forecasts.

Question #23 of 60

Based on the entire eight years of data presented in Exhibit 2, which substyle of market-

oriented investing is Zable most likely implementing?

A) Growth tilt.

B) Style rotation.

C) Growth at a reasonable price.

Question #24 of 60

Would a portfolio allocation of 40% to a market index fund and 20% each to Xetec, Yang,

and Zable achieve Edovic's stated objectives?

A) Yes.

B) No, because it would exceed the maximum active risk.

C) No, because it would not achieve the minimum information ratio.

Question #25 of 60